Personal Finance.

Putting A Premium On Insurance

Price Of Long-term Guaranteed Policies May Rise If New Regulations Are Passed

May 03, 1994|By Kathy Kristof, Los Angeles Times Syndicate.

A complicated proposed insurance rule may soon drive up prices-or reduce the availability-of so-called "guaranteed premium" term life insurance policies. That has some agents pushing these policies with a vengeance, claiming that current rates and guarantees may never be available again.

"Those people who want to lock in fixed rates on term policies ought to think about doing it before the end of the year," says Bernie Weinberg, vice president of Shadur, Weinberg & Associates in Encino, Calif.

That's when the National Association of Insurance Commissioners (NAIC) is expected to enact complicated new regulations that tighten reserve requirements-the amount of money the insurer must keep in the bank to ensure its financial stability-on these types of policies. The upshot is that many industry experts believe that the price of long-term guaranteed premium policies will rise and there will be fewer such policies issued in the future.

Shaky financial health

However, some say the change is positive because some companies that are offering the lowest-priced policies are flirting with disaster-and promising to take millions of consumers with them.

What is a guaranteed premium term policy and why would anyone want one? It's a hybrid product that aims to mesh some of the attractive elements of whole life policies and term life policies.

Term life insurance covers you for a set period, usually a year. If the insured person dies within that year, the policy pays off. If he or she doesn't, it expires. This type of policy does not build up any cash value. But most insurers allow their term policyholders to renew the life insurance-without regard to the insured person's health-at the end of the term by paying another premium.

Whole life policies, on the other hand, usually offer level premiums over the life of the policy and build up cash value over time. If the insured person dies while the policy is in force, the policy pays a death benefit. If the insured person lives, and continues paying premiums, he or she can eventually withdraw or borrow against the cash buildup in the policy.

The problem is that these policies are comparatively expensive and their cash value builds very slowly. Where a 45-year-old male non-smoker would pay $418 premium for a $250,000 term-life policy, he'd pay $2,100 for a similar whole life policy with Transamerica Occidental Life, says Weinberg. After four years and $8,400 in premiums, this whole life policy would have a cash value between $1,570 to $2,045-depending on what happens with interest rates.

Most consumer advocates maintain that term insurance is a better buy. But many consumers are wary of term insurance because they're worried about the steadily rising premiums. A policy that cost $300 when you are 45, for example, may cost more than $1,000 when you're 55. As a result, some fear the premiums will prove too costly to handle several years down the road.

Enter "guaranteed premium" term life. These policies work just like other term policies, but their rates are guaranteed to stay the same for as long as 15 or 20 years. How they do that is simple. The insurer simply averages out the premiums. If you buy a guaranteed premium policy, you'll pay more in the early years and less in the later years than you would with term life. In a sense, it's like buying a fixed-rate mortgage over an adjustable mortgage.

And, just like the fixed vs. adjustable mortgage question, consumers need to consider how long they'll need the insurance before buying a guaranteed premium policy. If you buy a long-term guaranteed premium policy and find you don't need the insurance for the entire term, you'll have wasted a significant amount of money, says Kenneth L. Ingram, president and chief executive of TermQuote in Dayton, Ohio.

Check out insurer

You also need to look closely at the insurer's financial health before buying a long-term guaranteed premium policy, experts note. That's because you are paying extra money upfront for a long-term commitment from the insurer. If the insurer isn't around to follow through, you've wasted your money.

In fact, the purpose of the NAIC's proposed rule is to ensure that insurers stay healthy, particularly when they're making these sort of long-term commitments. Some of the insurers offering the longest rate guarantees at the lowest prices are playing financial roulette, says Joseph Belth, an Indiana-based insurance analyst and editor of Insurance Forum. But if these companies die, consumers will suffer.

Why? When insurers topple, they're taken over by regulators who operate the companies until they're able to liquidate or sell the company's assets. They also have the right to change many of the guarantees, rates and terms of their policyholders' contracts.

Where can you go to check life insurance prices to see if you're getting a good deal? There are several firms that research the rates of many term insurers to find the lowest prices. Two that offer particularly thorough searches are Quotesmith (800-556-9393) and TermQuote (800-444-8376). Quotesmith charges $15 for the service; TermQuote doesn't charge consumers. It gets paid by the insurance companies it recommends.